Warren Buffett's Elephant Gun Could Target Utilities Deals

Written by: Antoine Gara05/09/12 - 10:28 AM EDT

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NEW YORK ( TheStreet) -- Did Warren Buffett give a not so subtle hint that his "elephant gun" is targeting utilities, a sector where Berkshire Hathaway's (BRK.A) MidAmerican Energy is already one of the largest players in the U.S.?

Buffett fanned speculation at last weekend's Berkshire Hathaway annual meeting about another big acquisition when he said Berkshire had come close to cutting a $22 billion deal during the last quarter of 2011. Buffett said that the deal fell apart because of a disagreement on price and his unwillingness to sell any of his stock investments, nevertheless, he expressed confidence that in the future Berkshire will be able to bag M&A prey as large or larger than Berkshire's $26.5 billion acquisition of Burlington Northern Santa Fe .

Buffett's elephant gun is nothing new, and the never-ending question is what companies could Berkshire buy?

The universe of potential deals to speculate over is expansive, given Berkshire's financial might and the number of sectors in which the company already has exposure and a predilection for deals. However, Buffett's statement that the firm is looking to invest $100 billion in MidAmerican Energy may be worth a focus.

Investing Berkshire Hathaway's cash faster than the company generates it has become a major issue for Warren Buffett as Berkshire's cash stockpile sits at above $37 billion and the company draws in $1 billion a month in free cash flow. This cash "problem" has spurred the legendary value investor to put his money behind consistent-returning but capital intensive businesses like railroad BNSF in 2010 and chemicals giant Lubrizol in 2011.

It is also behind the comment made by Berkshire Hathaway vice chairman Charlie Munger at the shareholder meeting, "MidAmerican Energy may have an opportunity to deploy as much as $100 billion over the next 10 to 15 years at very reasonable rates." Much of that spending is likely to consist of capital expenditures, but the $100 billion estimate leaves room for strategic deals, and the figure came as one of the biggest surprises to Berkshire watchers at the shareholder meeting.

"That was far north of what I would have previously estimated," says Tom Lewandowski, an analyst with Edward Jones, adding, "Regulated returns are pretty attractive."

"Clearly utilities is a sector he is ready, willing and able to make very large investments in," says Whitney Tilson, the founder of T2 Partners and the Tilson Mutual Funds. "I don't see anything in the current stock portfolio that Warren Buffet is likely to make a bid for," adds Tilson. Buffett had purchased increasing equity stakes in Burlington Northern shares on three occasions leading up to pulling the trigger on the acquisition.

PG&E(PCG) , for example, with a market cap of $18.8 billion, would roughly be in line with the $22 billion sized-deal when assuming a premium, and it's in a sector already seeing consolidation as regulated merchant power businesses look for cost synergies to overcome falling natural gas prices and others look to pick up regulated customers.